of factors like subdued external demand and lack of reliable power supply amidst coal shortages.

"Investment intentions in new projects improved marginally in Q2 of 2012-13, but investment is held back by project delays. Coal supply issues facing power sectors are yet to be fully resolved. Road investments have stalled due to issues relating to environmental clearances, land acquisition and financial closures", RBI said.

Observing that improvement in investment climate is a prerequisite for economic recovery, the RBI said, "demand conditions remained tepid, with private consumption continuing to decelerate and with investment yet to recover".

It further said that the trend of sluggish sales by India Inc was likely to continue in the third quarter of the current fiscal.

RBI said that quality of fiscal adjustment remains a concern, even as fiscal risks have reduced in 2012-13.

Government is working towards achieving revised fiscal deficit target of 5.3 per cent of GDP by restricting both plan and non-plan expenditure during the last quarter of the year, even as significant shortfall in tax revenue is likely. "Increased public investment to crowd in private investment along with removal of structural impediments that is slowing private investment is needed to pull the economy out of the current slowdown," the RBI added.

Since the start of 2012, the RBI said, it has worked towards easing monetary and liquidity conditions in a calibrated manner without jeopardising moderating inflation.

On CAD, it said the widening deficit (CAD) has emerged as a major constraint in easing monetary policy.

"With the likelihood that CAD/GDP ratio may exceed 4 per cent of GDP for the second successive year in 2012-13, prudence is necessary while stimulating aggregate demand," it said.

The CAD/GDP ratio reached its highest ever peak of 5.4 per cent of GDP in Q2 of 2012-13. Early indications are that it may increase further in Q3 of 2012-13. CAD has widened mainly due to worsening trade deficit.

It further said strong capital flows have facilitated financing of CAD, resulting only in marginal draw down of reserves.

While increased FII debt investment limits may enhance inflows, they do not provide a solution to CAD financing on a sustainable basis, the RBI added.

The central bank also said that improved global liquidity and recent policy reforms have aided FII inflows, leading to a turnaround in equity markets and revival of the Initial Public Offering (IPO) market.

Referring to agricultural sector, the RBI said Rabi crop is expected to be normal